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Davies, H. and P.D. Ellis (2000), “Porter’s ‘Competitive Advantage of Nations’: Time for a final judgment?,” Journal of Management Studies, 37(8): 1189-1213.
PORTER’S ‘COMPETITIVE ADVANTAGE OF NATIONS’: TIME FOR THE FINAL JUDGMENT?
Howard Davies
Professor, Department of Business Studies, Hong Kong Polytechnic University Hung Hom, Kowloon, Hong Kong, (852) 2766 7137
Paul Ellis
Assistant Professor, Department of Business Studies, Hong Kong Polytechnic University Hung Hom, Kowloon, Hong Kong, (852) 2766 7108
ABSTRACT
Porter’s (1990) ‘Competitive Advantage of Nations’ was heralded on publication as a book which
could build a bridge between the theoretical literatures in strategic management and international
economics, and provide the basis for improved national policies on competitiveness. This review of
the papers published in the following six years suggests that the book was enormously rich in its range
and scope but that there were too many conceptual flaws, particularly of elision, for the theory to
amount to more than a useful taxonomy. The research methodology was also flawed and subsequent
empirical studies have tended on balance to refute the theory’s major assertions. Sustained prosperity
may be achieved without a nation becoming ‘innovation-driven’, strong ‘diamonds’ are not in place in
the home bases of many internationally successful industries and inward foreign direct investment
does not indicate a lack of competitiveness. The claimed integration between international economics
and strategic management rests upon a mistaken attempt to substitute ‘competitive advantage’ for
‘comparative advantage’. Policy-makers are left with a list on which to base simple SWOT-type
analyses of their economies’ positions with respect to the competitiveness of different industrial
sectors, but no reliable guide with respect to appropriate policies to pursue. Developing countries in
particular are given considerable encouragement to pursue policies which may actually be harmful.
Porter - The Final Judgment?
INTRODUCTION
When The Competitive Advantage of Nations (hereafter CAN) was published in 1990 it triggered a
wave of interest, as befits a major piece marking a significant development in the work of the world’s
best known business academic (de Man, 1994). Much of that interest manifested itself in newspapers
and popular magazines, and was of ephemeral value, being concerned to summarise the main points
of the analysis and its implications for policy-makers. However, the academic literature also began to
grow, first through more than 30 reviews and then in the form of nearly 50 published articles.i The
purpose of this paper is to re-assess the analysis presented in the book, in the light of that literature.
PORTER’S ANALYSIS
The main elements of the analysis in CAN have been incorporated into almost every popular
undergraduate text on international business (Daniels and Radebaugh, 1994; Griffin and Pustay, 1995,
pp. 96-99; Hill, 1994, pp. 137-141; Rugman and Hodgetts, 1995, pp. 420-425), to the point where
their familiarity means that they need little repetition. Nevertheless, it is useful to set out their broad
sweep in order to help interpret the sometimes complex and confusing debate which followed the
book’s publication.
Porter’s fundamental objective in CAN was nothing less ambitious than to elucidate the
reasons why ‘some social groups, economic institutions and nations advance and prosper’ (Porter,
1990, p. xi). The social group with which he was most concerned was the nation, and he suggested
that ‘the only meaningful definition of competitiveness at the national level is national productivity’
(p. 6). Having established that starting point, he then went on to argue that a nation is essentially an
aggregation of industries, its economic performance is determined by the competitiveness of those
industries and the appropriate level of analysis should therefore be the industry. A nation’s industries
are then interpreted to be made up of those firms for whom the country is a ‘home base’ (p. 19). In
some parts of the analysis, and Porter’s extensions of it (e.g. Porter, 1995) the focus shifts from the
nation to a sub-national region or a city, but there is no doubt that the central concern is with the
factors which make the people resident in one place more prosperous than those in another. (The
emphasis on place is important in view of some of the confusions which have arisen within and
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around the analysis.) Having carried out field studies in ten different nations (Denmark, Germany,
Italy, Japan, Korea, Singapore, Sweden, Switzerland, the United Kingdom and the United States)
Porter put forward two major propositions.
The first of these propositions (set out in Chapter 3) is that the ‘competitive advantage’ of a
nation’s industries is determined by the configuration of four broad attributes of the national
location, referred to as the ‘home base’. These are the now-familiar corners of the ‘national diamond’,
namely factor conditions, demand conditions, related and supporting industries, and firm strategy,
structure, and rivalry.
With respect to factor conditions, an industry requires an appropriate supply of factors in its
home base if it is to be successful. If they are to be useful in explaining industries’ performance,
factors need to be defined at a much more disaggregated level than the simple trinity of land, labour
and capital and the most useful differentiation may be very fine. However, broad distinctions may be
drawn between ‘basic’ factors which are inherited, like climate and unskilled labour, and ‘advanced’
factors which have to be created, like computer scientists or telecommunications infrastructure, and
also between ‘generalized’ factors which can be deployed in a wide range of industries and
‘specialised’ factors, which cannot. While the abundant supply of an appropriate factor may help an
industry to compete (e.g. Denmark’s success in furniture reflects a pool of graduate furniture
designers (p. 78)), it is also possible that ‘selective factor disadvantages’ in the form of shortages and
high costs for basic factors may have a stimulating effect (e.g. Italy’s expensive capital and energy,
and their lack of local raw materials, forced its private steel producers to develop mini-steel mill
technology, in which they have become world leaders (p. 82)).
Demand conditions in the home base affect an industry’s ability to compete internationally
through three mechanisms. First, an industry will have an advantage in market segments which are
more important at home than elsewhere (e.g. Swedish firms lead in high voltage electricity
distribution over long distances because of their experience in serving their remote and energy-
intensive steel and paper industries (p. 87)). Secondly, sophisticated and demanding buyers pressure
companies into meeting high standards (e.g. Japanese consumers value space-saving, giving Japanese
firms a lead in a range of compact products, while America’s long distances have led to competitive
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strength in very large truck engines (p. 89)). Thirdly, a nation’s industries gain if the needs of its
buyers at home anticipate the needs of buyers in other countries, thereby giving it a lead in learning
how to meet those needs. (Japanese buyers and government forced firms to make energy-saving
products before energy costs became more important elsewhere; Americans’ desire for convenience
has spread elsewhere, giving an advantage in fast food (pp. 91-92).) In each of these instances, it is
not the size of the home market which is important, but the extent to which it encourages firms to
innovate. A large home market which meets all three conditions will be highly supportive of
international competitiveness, but a large market which is not may simply encourage firms to focus on
their undemanding local buyers, leading to stagnation and inability to sell abroad. Saturation of the
domestic market may provide the spur which sets firms ‘going abroad’, forcing them to compete in
the world market if they are to grow.
Related and supporting industries make up the third corner of the ‘diamond’. A nation’s
industries will be better able to compete internationally if there are ‘clusters’ of industries in the
home base economy which are linked to each other through vertical or horizontal relationships
amongst competitive supplying and buying sectors or common customers, distribution channels or
technologies. (Denmark has a cluster in ‘health’ and ‘home’ products, Sweden has clusters in sectors
associated with paper-making, and Germany in chemicals, metal-working, transportation and printing
(p. 149).)
The fourth corner of the diamond concerns the strategies and structures of home base firms,
and the extent to which there is rivalry amongst them. If the national environment favors family-
owned small firms, as in Italy (p. 108), the nation will tend to be competitive in industries which are
fragmented and do not experience significant economies of scale. If executives tend to have an
engineering background, as in Germany, competitive strength will be concentrated in sectors having a
high technical or engineering content. Where companies’ goals are short-term, because of the
governance and capital-raising mechanisms which are in place nationally, the nation will tend to be
successful in new industries with the possibility of a quick return. Where their goals are long-term,
they will be better suited to industries which require consistent re-investment (p. 112).
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Perhaps the most important aspect of this corner of the diamond concerns the need for rivalry,
particularly amongst domestic firms in the home base. In a significant move towards a more
‘Austrian’ and dynamic view of competition (de Man, 1994; Foss, 1996) Porter portrays domestic
rivalry as the major spur to innovation and hence success in international competition. As domestic
firms are most visible to each other, success on the part of one shows the others that further
development is possible in the local circumstances. Companies are forced to go beyond competing on
the basis of local advantages, which are available to all, thereby using those advantages as efficiently
as possible, up-grading them in the process (p. 119). Competitive pressure amongst those in proximity
to each other provides the dynamic which drives the search for internationally competitive products
and practices.
While the ‘diamond’ is the central focus of the analysis, allowance is made for two other
factors, ‘chance’ and ‘government’. The first of these includes unpredictable technological
discontinuities, wars and other chance events. These are not part of the diamond itself, but they may
alter the conditions within it. Similarly, government has a role to play, but only by affecting the
corners of the diamond.
After finding confirmation for this framework in case studies of four manufacturing
industries, each in a different country, (Chapter 5) and the service sector (Chapter 6), CAN goes on to
examine the nations which were successful in the early post-war period (Chapter 7), the success
stories of the 1970s and 80s (Chapter 8) and the position of the US and Britain (Chapter 9). These
lead to Porter’s second central proposition, in Chapter 10, which is that countries usually go through a
series of stages in their industrial development, moving from the factor-driven stage, to the
investment-driven stage, to the innovation driven stage, and finally to the wealth-driven stage. In each
of these stages, the industries which are successful in competition with those of other nations are those
whose competitive strategies are appropriate for the country’s stage of development. In the factor-
driven stage successful companies compete on the basis of low-cost, arising from cheap labour or low
cost natural resources. Wages are relatively low and the nation is not prosperous. Competitive
advantage derives from only one corner of the diamond, namely factor conditions (p. 547). In the
second stage heavy investments are made in factories and infra-structure and new industries emerge.
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The sectors which are successful are still competing on cost, but that is now achieved through scale
economies and state-of-the-art manufacturing practices applied to mature products, rather than low
wages. Competitive advantage is based on three corners of the diamond, factor conditions, demand
conditions and firm strategy, structure and rivalry (p. 550). The standard of living is higher but still
relatively low. If a nation is to achieve prosperity it must reach the innovation-driven stage, where
competition takes place on the basis of both product and process innovation. In this stage the nation
has strength in all four corners of the diamond. Prosperity is achieved and maintained unless the
nation proceeds to the wealth-driven phase, in which it essentially lives on its past and goes into
decline. In the wealth-driven phase, the country’s firms are run by stewards, rather than entrepreneurs.
Belief in the value of competition is less intense and rivalry is reduced, as powerful firms seek
protection through government policy. The motivation to innovate is reduced, employees become
more interested in non-economic aspirations, and national goals become more concerned with wealth
distribution than wealth production.
CAN’s findings may be formulated as five empirical assertions. The first (in terms of logical
priority, rather than the sequence in CAN) is that a nation must reach the ‘innovation-driven’ stage of
development if prosperity is to be reached and sustained. The second is that a nation’s prosperity is
determined by the performance of the firms for whom it is a home base. The third is that in order to
achieve sustained prosperity a country must develop clusters of related industries which have strong
‘diamonds’ in the ‘home base’ nation. The fourth is that outward foreign direct investment is a
manifestation of an industry’s competitive strength, and therefore the nation’s prosperity, while
inward investment is a sign of relative weakness. The fifth is that international success cannot be
based upon the comparative advantage brought about by basic factor conditions but must be built on
the ‘up-grading’ of a nation’s industries through innovation, product differentiation, branding and
superior marketing.
While these propositions are simple enough they have led to a complex and often frustrating
debate in which Porter, his critics and his supporters argue with each other about different issues at
different levels on logical grounds which are constantly shifting. In order to map that debate, and
attempt some closure upon it, this paper begins by examining the reception which the book first
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received on publication, and then goes on to consider the conceptual and empirical findings of those
who sought to build on the initial work.
THE REVIEWS
The reviews which greeted CAN’s publication were mixed in the extreme, ranging from the fawning
to the choleric with no consensus in sight (Carney, 1991). Furthermore, both critics and supporters
found very different grounds on which to damn or praise, reflecting both their own fields of interest
and the tremendous richness of their subject. The reviewer for Contemporary Sociology suggested
that CAN was one of the most interesting recent books for the field of organisational ecology, despite
the fact that it made not one reference to the subject and the author had apparently never read anything
in the field! (Westney, 1992). The reviewer for Political Quarterly (Metcalfe, 1991) criticized Porter
for under-estimating the role of government, while British Labour Party politicians reviewing for the
London Review of Books (Brown and Mulgan, 1990) praised him for advocating government
intervention. Grant (1991, p. 535), in the Strategic Management Journal, saw CAN as a work which
‘bridges the gap between strategic management and international economics, while contributing
substantially to both’, while Congdon (1990, p. 41) in the Spectator found it ‘fatuous’ and Miller in
The Public Interest (1990, p. 104) wondered ‘how a book devoid of original insights can be thought
so important’. The Journal of Management (Pressman, 1991) saw an important insight to be that firms
cannot do abroad what they have not learned at home, but expressed uneasiness that if pursued in
more detail the points in Porter’s diamond turn out to be determined by national character and culture.
Gray (1991), writing in the International Trade Journal, focused on the book’s failure to recognize
the importance of price competition and the exchange rate in determining international trade, even in
advanced goods. In the Journal of Development Economics, Smith (1993) described CAN as
‘extraordinarily important for the development field’ focusing on the distinction between ‘basic’
factors and ‘advanced’ factors, the attempt to build a more Schumpeterian non-equilibrium analysis,
and the inclusion of clusters, interpreted as Marshallian industrial districts, as the key features. Jelinek
(1992), reviewing for Administrative Science Quarterly averred that while the book was ‘not perfect’,
being marred by misnumbered Tables and a number of garbled sentences, it would do nothing less
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than ‘rescue Economics from its long sojourn as esoteric and impractical theorizing’. These
differences of opinion on the content extended to matters of style with a majority of reviewers making
references to the book’s unnecessary length and turgid prose, countered by the review in the Journal
of Marketing, which found Porter’s ‘vivid descriptions more gripping and inspiring than a novel’
(Clark, 1991, p. 119).
Amid this jumble of contradiction, a number of issues emerged as the focus of debate. The
first concerns the meaning and appropriateness of the terms ‘competitiveness’ or ‘competitive
advantage’ and the relationship between the competitiveness of an economy and that of the industries
and firms which operate within it or for whom it is a ‘home base’. While Sagebien (1990, p. 95) found
that Porter’s ‘greatest contribution lay in his definition of competitiveness as national productivity’
others found the same proposition to be a major source of confusion and error. At the level of
measurement, Eilon (1990) pointed out that productivity is a measure of the efficiency with which
resources are used, while competitiveness is usually interpreted as the ability to secure market share
against competition. These are different things between which Porter shifts from place to place so that
‘[A]fter 800 pages... the reader is none the wiser about how competitive advantage is to be defined, let
alone measured.’ ii
More fundamentally, a number of reviewers noted the difficulties associated with the
assertion that the competitiveness or productivity of a nation (which is a group of people in one place)
is essentially the competitiveness or productivity of ‘its’ industries, if those industries are interpreted
with Porter to mean the companies for whom the nation is a home base. Clark (1991, p. 120) posed
the question ‘[W]hen Japanese auto-makers set up factories in Britain and beat home-grown firms at
their own game using the same factors of production, is it an indication of British competitive
advantage or disadvantage, or of Japanese competitive advantage?’ In the same vein Reich (1990)
noted that General Electric, which is an American company with its home base in the United States,
achieves a high level of productivity in Singapore, but that does not necessarily bring a higher
standard of living to Americans. What determines the prosperity of a country’s residents is the
productivity of those activities which take place within the nation’s boundaries, supplemented by the
nation’s net property income from abroad. A part of every country’s gross domestic product arises
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from the activities of companies based in other nations. As companies’ activities become more global
and less concentrated within their home base countries, so it becomes less appropriate to identify a
country’s prosperity with the activities of those firms for whom it is the home base. Porter’s
conviction that ‘competitiveness’ must be the main determinant of the prosperity of the people in one
place led him to identify competitiveness at national level with national productivity, which is not
unreasonable. However, he was wrong in the next step when he argued that the
competitiveness/productivity of a nation’s residents depends on the competitiveness of those firms for
whom it is the home base. The mind-set of the international business academic, accustomed to seeing
America in the activities of American-owned firms world-wide, allied with the elision of the terms
‘productivity’ and ‘competitiveness’ led to a simple logical error, hidden in what Congdon (1990, p.
42) described as a ‘clumsy verbal gavotte’ between the terms ‘nation’, ‘industry’ and ‘company’. In
so far as Porter later went on to use export-share statistics as the empirical basis for identifying a
nation’s ‘competitive’ industries he partly and inadvertently corrected the error, but in so doing he
opened up a gap between the entity whose performance he was measuring (companies located in the
nation, wherever their home base) and that which he was discussing (companies whose home base is
in the nation).iii One of the central problems of CAN, identified in the reviews, is that in most places it
is the success of a location which is being discussed, while in others it is the success of firms based in
that location, but operating in part elsewhere. The object of the analysis shifts from place to place.
The second set of issues on which the reviews focused concerned Porter’s methodology and
mode of reasoning. Some praised his ‘fact-derived’ approach, including the reviewer for the Journal
of Business Strategy, who also drew the rather baffling conclusion that CAN demonstrated the
superiority of competition amongst firms over efficient markets as a mode of organisation, as if the
two were in opposition to each other (Davidson, 1991). A number took the opportunity to combine
praise for Porter’s practical and relevant approach with a little harmless economist-bashing. These
included Magaziner (1990, p. 189) who declared that ‘business strategists have also long known that
the simplistic precepts of classical and neo-classical microeconomics are out-moded’. On the other
hand, reviewers more familiar with economic analysis (Economist, 1990) noted that virtually every
proposition in the theoretical part of CAN is a commonplace to economists, including the role of
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innovation in international trade, the impact of different consumer preferences, and the role of intense
rivalry in stimulating innovation. It is perhaps noteworthy that the Journal of Development Economics
was the only major academic journal in Economics which even deigned to review CAN, an indication
of either Olympian disdain for its claims, or ivory-tower isolation, according to the reader’s taste.
The great majority of the reviews, including some of the most hostile, praised the richness and
intrinsic interest of Porter’s cases, and some saw the meticulous assembly of cases using a common
framework as firm evidence for the value of the case method (Greenaway, 1993). However, many had
reservations about the research methods on which the findings were based. Ingram (1991, p. 50)
observed that Porter’s propositions somehow emerge from ‘a shower of anecdotes’ and are better
considered as suggestive hypotheses than theory development. However, those hypotheses are never
subjected to convincing tests. No indication is given of how the cases for detailed analysis were
selected so that there are sampling problems, which raises doubt about the external validity of the
findings. By focusing solely on industries deemed to be successful an evident bias is introduced and
while patterns which appear to be common amongst these successful industries are interpreted as
success factors, there is no means of checking whether they also appear in industries which fail. In
any event, as Clark (1990, p. 119) noted the ‘method by which the conclusions are derived is
submerged and somewhat hidden’ and very different conclusions might be reached on the basis of the
same data (Wood, 1990).iv
A closely related criticism, expressed with waspish sarcasm by Congdon (1990, p. 42) is that
Porter’s mode of reasoning is faulty to the point of sophistry. CAN presents the reader with empty
sentences of the type ‘x is x because x is x’. Such statements most commonly arise in the form ‘a
nation/industry is successful when it has the environment required for success and firms are thereby
encouraged to be successful’. If the issue is pursued and the question asked ‘what then are the
requirements for a successful environment’, the intermediate level answer is a strong diamond
(though only in the innovation-driven stage of development). However, even without the qualification
concerning stages, that is another empty statement unless the required characteristics for a strong
diamond are clearly identified. When the level of operational detail is finally reached, too many of the
supposed requirements for success turn out to have counter-examples. For instance, an abundant
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supply of suitable factors is often the source of advantage. On the other hand, in many cases a
shortage of factors may also be an advantage. It might be argued that this apparent contradiction can
be resolved through the distinction between ‘basic’ factors, whose shortage may stimulate innovation,
and ‘advanced’ factors which are required to be in abundance. However, Porter’s own example,
supposedly selected for its clarity, shows that this is not the case. In the Dutch cut flower industry a
cold climate (lack of a basic factor) forced firms to innovate, supposedly demonstrating the
proposition. However, in the same industry in the same place, the abundance of another basic factor
(natural gas) was also an important supportive influence (CAN, p. 85). It is impossible to predict the
outcome if the Dutch had enjoyed a warm climate, but had no sources of natural gas and difficult to
avoid the conclusion that the analysis is simply ex-post rationalization. The necessary conditions for
strength in each individual corner of the diamond are not identified with any clarity so that as Reich
(1990) noted, the four corners, supplemented by chance and government, are so broad that they
include everything which might contribute to success, thereby identifying nothing as particularly
significant. In Congdon’s view (1990, p. 42.) these weaknesses render the diamond ‘completely
fatuous, corresponding logically to the statement that movement may be to the North, South, East or
West’. While that judgment may be unnecessarily harsh, those reviewers who paid attention to
questions of method are well represented by Grant’s (1990, p. 542) comment that ‘[A]mbiguity over
the signs of relationships, the complexity of interactions and dual causation renders the model
unproductive in generating clear predictions’.
To summarise the reviews then, attention focused on questions of definition, the validity of
Porter’s claim that a nation’s prosperity is dependent upon the success of the firms for whom it is a
home base, the methodology and mode of reasoning, and the value of the diamond model. Despite the
fact that in Porter’s schema the full diamond model is strictly only relevant to innovation-driven
economies, only two of the reviews made any substantive comment on the stages model of
development. The exceptions were Thurow (1990) and Reich (1990), who both saw Porter’s failure to
identify the factors which determined whether or not an economy enters the wealth-driven stage of
decline as a key weakness.
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Porter’s admirers saw CAN as an integrating device between different disciplines, a theory
which might help to explain success in international trade and a framework for empirical work and
policy prescription which could be applied to other countries. His detractors saw a set of theoretical
commonplaces, a dubious methodology, and a laundry list of environmental attributes and firm
behaviours which might or might not help industries succeed in international competition. Both sides,
with the exception of a few totally dismissive detractors, saw the need and the opportunity for further
work to be carried out, using CAN as a starting point.
In order to give some structure to the review of that further work, the remainder of this paper
is organised into three main sections. The first examines the issues arising in respect of the
comparison between the concept of competitive advantage and that of comparative advantage. The
second examines the conceptual issues which were raised amongst academicians of International
Business. The third goes on to consider the empirical studies which attempted to develop and apply
the analysis set out in CAN.
CONCEPTUAL ISSUES I: COMPETITIVE ADVANTAGE VERSUS COMPARATIVE ADVANTAGE The most ambitious claim made for CAN by Porter (1990, p. 20) and others (Ettlinger, 1991; Grant,
1990) was that it rendered economic analysis more relevant by replacing the outdated concept of
comparative advantage with the more dynamic concept of ‘competitive advantage’. The former was
described as providing a static explanation for success in international trade on the basis of relative
endowments of internationally immobile ‘basic’ factors, while the latter put forward a more useful
dynamic explanation based upon the up-grading of factors and innovation. However, both Porter and
the reviewers who supported that contention appeared to believe that the economics of international
trade ended with the Heckscher-Ohlin theorem (Grant, 1991, p. 240), while in fact more recent trade
theory has taken into account most of the supposedly ‘new’ elements raised in CAN, including the
mobility of financial and physical capital, trade based on superior technology and trade based upon
differing patterns of consumer preference. (See Caves, Frankel and Jones (1993) for a textbook and
Deardorff (1984), Ethier (1984), and Krueger (1984) for survey articles.)
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The trade-theoretical claims made for CAN are so easily dismissed that the economics
profession hardly bothered to respond to them, pace Waverman (1995). Nevertheless, in the broader
discussion of international business and national policies, the substitution of ‘competitive advantage’
or ‘competitiveness’ for ‘comparative advantage’ has become sufficiently commonplace to be
described as an ‘obsession’ (Krugman, 1994) and to justify closer attention and counter-argument.
Governments and industry leaders in countries as diverse as Finland (Ministry of Trade and Industry,
1993), Hong Kong (Berger and Lester, 1997; Enright, Scott and Dodwell, 1997), Venezuela (Enright,
Frances and Scott Saavedra, 1996), Switzerland (Enright and Weder, 1995), New Zealand (Trade
Development Board, 1990), and Indonesia (Habibie, 1993) have embraced policy initiatives or
supported studies based on the belief that the key to their economic prospects lies in the development
of their competitive advantage. However, as Warr (1994) points out, the attempt to substitute
‘competitive advantage’ for ‘comparative advantage’ rests on a misunderstanding and a false analogy.
The theory of comparative advantage explains which goods should be produced domestically and
exported, and which should be imported. It therefore explains to which industries a country’s scarce
resources should be allocated if they are to be used most efficiently and national income is to be
maximised. It says nothing at all about the superior economic performance of one nation over another,
and was never intended to. ‘Comparative advantage’ is about which industries a country should have,
while ‘competitive advantage’ is about how firms within industries (especially those of the
industrially advanced countries) compete with each other. The elision of the two, and the resulting
emphasis placed on the ‘need’ for firms to compete on a basis other than cost, even in developing
nations, leads to dangerous policy recommendations whereby poor countries are exhorted to change
their product-mix towards more differentiated and ‘high-tech’ products for which their current
resource endowments are inappropriate. It is true, of course, that countries with high levels of per
capita income tend (with some very significant exceptions) to produce and export more highly-
differentiated and ‘high-tech’ products. However, that is because over time they have used the
maximised income arising from specialisation according to comparative advantage to invest in the
resources needed to differentiate and innovate. Their resource endowments and hence comparative
advantage have shifted over time so that they currently lie in ‘up-graded’ products. To encourage
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countries which have not gone through that process to shift their resources away from the sectors in
which they have a comparative advantage in pursuit of ‘up-grading’ would be to reduce their current
income by reducing the efficiency of their resource allocation, thereby retarding the development
today of the resources which might be used for up-grading tomorrow.
CONCEPTUAL ISSUES II: THE VIEW FROM THE ACADEMY OF INTERNATIONAL BUSINESS While the economists largely ignored CAN, its publication triggered a good deal more activity
amongst academicians of international business, including a Special Issue of Management
International Review devoted to the Porter framework and the first issue of the Journal of Far Eastern
Businessv which was devoted to papers on the application of CAN in the ‘Far East’.
Some of these papers serve well to illustrate the confusion caused by Porter’s lack of clarity.
Daly (1993), for instance, in common with Eilon (1990) and Gray (1991) and quoted with approval by
Waverman (1995), claimed to have refuted Porter’s claim that exchange rates and wages are
unimportant in the determination of competitiveness by showing that export growth and export shares
are affected by exchange rate changes and labour costs. However, Porter’s definition of
competitiveness is in terms of national productivity, not export shares (even if he uses export share
figures extensively in his empirical work). His assertion that competitiveness cannot be meaningfully
defined in terms of low wages or a favourable exchange rate (CAN, p. 7) is not an claim that export
share cannot be increased through those changes, but an assertion that export share gained in that way
does not improve the well-being of a nation’s residents. Daly’s paper refutes a claim which Porter
never made.
Two more significant points of contention are Porter’s insistence that firms’ ability to
compete depends largely upon the strength of the diamond in their ‘home base’ and his assertion that
national economic performance depends upon firms for whom the nation is the home base. Both of
these have been attacked as inappropriate at a time when the world economy has become increasingly
globalized, and the multinational enterprise increasingly important. Dunning (1993, pp. 9-10) points
out that in the 1990s ‘an increasing proportion of the assets of firms in a particular country are either
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acquired from or are located in, another country’. For firms having a large proportion of their
operations outside their home base it is ‘ludicrous’ to suggest that their competitive position rests
solely or largely upon the strength of diamond in their home base, although their initial move abroad
might have been based on those advantages. From the national point of view, it is also clear that the
income of a country (the people in one place) is partly determined by the operations of that country’s
firms in other countries, and foreign-owned firms in their local activities.
These evidently valid arguments echo the comments of many reviewers and suggest that the
‘diamond’ model should be re-appraised and amended, in line with Dunning’s (1993, p. 12)
suggestion that ‘national diamonds have to be replaced by supranational diamonds’. While the precise
criteria on which the diamond might be given a more appropriate geographical basis have never been
spelt out, a number of authors have identified ‘ad hoc’ examples where influences outside the ‘home
diamond’ appear to have been crucially important. Rugman (1991, 1992), Rugman and D’Cruz (1991,
1993) and Rugman and Verbeke (1993) note that the model is particularly flawed if applied to small,
open trading economies and they suggest that in the Canadian case a ‘double diamond’ model would
be more appropriate, bringing together the Canadian and US diamonds. Similarly, Hodgetts (1993)
examined the Mexican case and argued that the competitive strength of that country’s strategic
clusters rests on their ability to draw on the United States diamond, learning from demanding US
customers, using resources from both countries, and purchasing inputs from the supporting industries
in both places. The same point has been made when the diamond has been considered in the context
of other small ‘non-triad’ nations, as in the case of Austria (Bellak and Weiss, 1993), Australia (Ellis
and Pecotich, 1996; Yetton, Craig, Davis and Hilmer, 1992), Finland (Yla-Anttila, 1994), Hong Kong
(Davies, Whitla and Kwok, 1995; Redding, 1994), the Netherlands (Jacobs and de Jong, 1992) and
New Zealand (Cartwright, 1993). The argument that successful companies draw solely or even largely
on their home diamond is not supported at the conceptual level.
It is easy to see why the importance of the ‘home base’ diamond should be refuted in the
context of small open economies, but none of the papers which focused on these economies took the
logical step of noting that the argument is generalizable. If firms in small open economies can draw
on the diamond in other countries, there is no reason to suppose that firms in the ‘triad’ economies
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Porter - The Final Judgment?
cannot. Small open economies provide the most obvious illustration because firms in such locations
very often must draw on overseas diamonds because a small economy almost certainly lacks at least
one strong corner of the diamond. Firms from the triad may not need to do so, because the large size
of their domestic economies renders it more likely that four strong corners are in place. However, they
may draw on the diamond in other places as the cases of IBM, Nestle, SKF, Phillips and BAT cited by
Dunning (1993, pp. 9-10) make clear. Of course, if even a small proportion of firms in any country
are able to draw upon diamonds in any other, the concept of the national diamond is stripped of its
content.
A third point of contention between Porter and other academicians of international business
concerns his recurring conviction that outward foreign direct investment (FDI) is a sign of
competitive strength in a nation’s industry while inward investment indicates that ‘the process of
competitive up-grading is not entirely healthy’ (CAN, pp. 671). Lau (1994) points out that from an
economic perspective, capital flows towards to the locations where it is most highly productive, in
which case the inflow of foreign direct investment could actually be regarded as a positive indicator
of competitiveness. Dunning (1993, p. 12) suggests that Porter’s interpretation of the link between
FDI and national competitiveness rests upon the idea that outward foreign direct investment reflects
the possession of firm specific tangible assets which give a competitive edge prior to undertaking the
FDI. While that may be a valid part of the explanation for why individual firms are able to undertake
FDI, as in the ‘eclectic’ model of FDI (Dunning, 1977) and it may be correct to conclude that firms
who invest abroad possess important advantages, it does not follow that inward FDI has a negative
effect on the productivity/competitiveness of the recipient economies. It may be correct to conclude
that, at the time when the incoming investment took place, local companies were at a competitive
disadvantage relative to the foreign incomers. However, that is not to say that residents of the host
economy were left worse off, even in the short run, and in the long run local firms may have actually
gained through the stimulus of competition and by learning from the incomers. Porter’s most basic
confusion, whereby he identifies the competitive success of home base companies with the
productivity and well-being of local residents, leads to a misinterpretation of the role of the
multinational.
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Porter - The Final Judgment?
This point has been taken up and extended by a number of other authors. Rugman and
D’Cruz (1993), examining the Canadian case, note that foreign-owned firms carry out the same level
of research and development within the country as domestic firms, thereby creating competitive
advantage locally. They also draw attention to the fact that in the Canadian case, foreign subsidiaries
export as much as they import. Hodgetts (1993) points out that MNEs have brought technology to
Mexico, allowing its industries to enhance their ability to sell abroad and Chia (1994) reminds that
residents of Singapore are wealthy despite being almost entirely dependent upon foreign affiliates for
both manufacturing output and exports. Liu and Song (1997) take up Dunning’s (1995) extension of
the Porter model to include ‘multinational business activity’ as a major determinant of the competitive
advantage of firms in a nation. They apply that model to China’s recent history and conclude that the
country’s recent success has been significantly attributable to inward FDI. These findings for the
Chinese case are doubly contradictory of Porter’s analysis because in common with Lin, Cai and Li
(1996) they also attribute China’s success to the exploitation of its comparative advantage in labour-
intensive sectors, as opposed to the pursuit of Porter’s recommended up-grading strategy. In the
Chinese case FDI has assisted the development of competitiveness, not hindered it, and that has been
done on the basis of the much-maligned comparative advantage, not competitive advantage.
While the most significant conceptual debate concerns these fundamentals, revealing the
weakness of CAN’s foundations, a significant number of writers pay them little attention. Despite the
already all-encompassing nature of the diamond framework and its consequent irrefutability and
‘elasticity’ (Redding 1994), they prefer to focus on amendments and further extensions which they
themselves would like to make. Van den Bosch and de Prooijen (1992) argue that national culture, as
measured by Hofstede (1980), should be given a more prominent place in the analysis and that Porter
was wrong to see culture as working through the various elements of the diamond. O’Shaughnessy
(1997) adds in custom, history and politics while Van den Bosch and de Man (1994) argue that
government, especially at ‘micro-level’ should be given a more prominent position. Cho (1994),
considering the Korean case, suggests that the Porter model of a four-cornered diamond supplemented
by government and chance, would be better replaced with a nine-factor model, which would group
four physical factors (endowed resources, business environment, related and supporting industries,
17
Porter - The Final Judgment?
domestic demand) and four human resources (workers, politicians and bureaucrats, entrepreneurs,
professional managers and engineers), supplemented by chance. Why that taxonomy is superior to the
Porter model is not explained, beyond noting that it focuses greater attention on the human factors
which the author claims to be the source of Korean success to date.
To sum up the response from academicians of international business, they found fault with
CAN in respect of Porter’s insistence that firms’ ability to compete depends on the strength of the
diamond in their home base. They pointed out that national economic performance does not depend
on that group of firms for whom the nation is the home-base and they found the role of the
multinational enterprise to be misinterpreted. They also suggested a series of additions and
amendments to the diamond model.
THE EMPIRICAL STUDIES
While CAN’s theoretical under-pinning is weakened by the criticisms examined above, much of the
book’s appeal lies in its marshaling of a huge volume of facts into a coherent pattern showing that
strong diamonds are needed if a nation is to have competitive advantage (in the innovation-driven
stage of industrial development). That provided a significant opportunity for researchers to replicate
the analysis, extend it to new locations, and develop alternative methodologies to test the book’s basic
propositions.
The further studies can be divided into three categories. First, there are two country studies, of
New Zealand and Canada, which are essentially extensions to CAN itself having been carried out by
Porter and his collaborators or consultancy colleagues (Crocombe et al., 1991; Porter and the Monitor
Company, 1991). Second, there are commentaries based upon general descriptive data for individual
economies which have assessed the usefulness of the model for those economies without actually
working through a systematic process of data collection and analysis. These include pieces on Mexico
(Hodgetts, 1993), Canada (Rugman and D’Cruz 1991, 1993) Singapore (Chia, 1994) and Hong Kong
(Redding, 1994). Thirdly, there have been at least ten detailed empirical studies which have directly
attempted to test all or some of CAN’s central propositions, drawing attention en route to the
methodological issues which arise.
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Porter - The Final Judgment?
Of these ten studies, seven focus on the hypothesis that competitive success requires strong
diamonds. Five of these involve at least partial replication of Porter’s approach by first using shares of
world exports to identify a nation’s most competitive sectors and then going on to assess whether
those most competitive sectors have strong diamonds in their home base. Yetton et al. (1992) re-
examine Porter’s own analysis for Canada and New Zealand and supplement that with an original
analysis for Australia. Their findings are that none of the competitive industries identified in the
countries examined have strong diamonds in their home base. As all three countries have high
standards of living and productivity per capita, the hypothesis that ‘strong diamonds’ are needed for
competitiveness is refuted. This study also makes two methodological points. The first is that in
economies with large endowments of natural resources the export share criterion, which selects
sectors as competitive if they have a larger share of world exports than the economy as a whole,
identifies resource-based industries as strong and manufacturing as weak, as a statistical artefact. The
second is that if a country’s firms operate overseas through local subsidiaries, in a multi-domestic
structure, they will not be identified as competitive by the export share criterion.
Bellak and Weiss (1993) adopt a similar approach in a study of Austrian industry.
Competitive sectors are first identified by using the disproportionate export share criterion but it is
then noted that this approach fails to identify an important cluster in winter sports because that sector
incorporates an important service element and the organisation of the Standard Industrial Trade
Classification (SITC) does not bring together the goods which it produces. It is also noted that some
of the ‘clusters’ found by using the SITC figures in fact consisted of a single firm, drawing attention
to the sometimes false assumption that goods in different SITC categories are produced by different
sectors. In contradiction to Porter’s central assertion it is found that for Austria’s competitive
industries the corners of the diamond reflecting demand conditions and strategy, structure and rivalry
were both weak. It is also found that inward foreign direct investment has been important for those
industries having high export shares and that both the service sector and chance had a significant role
to play in determining which sectors are most successful.
Jacobs and de Jong (1992) also use the export share criterion to identify competitive sectors,
this time for the Dutch case. The selected industries are examined for evidence of clusters using
19
Porter - The Final Judgment?
Porter’s distinction between ‘primary goods’, ‘specialty inputs’, ‘machinery’, and ‘associated
services’. Only one Dutch cluster is found to be both broad and deep and Porter’s descriptions of the
roles played by both ‘primary goods’ and ‘specialty inputs’ are found to be flawed. In the case of
‘primary goods’ an industry may shed these in the process of up-grading, but it will then be measured
as having a less deep cluster, despite the fact that it has become stronger. ‘Specialty inputs’, which
Porter describes as being relatively complex and differentiated may in fact be quite simple, not having
the role in ‘up-grading’ which is ascribed to them. Dutch industry varies widely in its geographical
scope with some sectors serving world markets from production bases solely located in the
Netherlands while others produce across the world, so that the importance of the home bases varies
significantly from sector to sector. This study also goes beyond Porter’s goods-based analysis by
examining the service sector, concluding that the Netherlands is strong in ‘goods-related service
sectors’ but weak in ‘knowledge-intensive’ services.
Davies et al. (1995) adopted the same basic approach for Hong Kong by first using the export
share criterion to identify competitive industries and then evaluating the corners of the diamond for
those industries, paying particular attention to the construction of ‘cluster charts’, using the
methodology set out in CAN. That process shows that Hong Kong’s most competitive industries do
not have strong demand conditions or favourable factor conditions in their home base. Furthermore,
the territory has only one cluster, which is related to apparel, and that is very shallow, there being no
competitive sectors in machinery, supporting functions or downstream business. As in the other
studies, the necessity for a strong home diamond as a condition for prosperity is refuted.
Suzuki (1994) calculates world export shares for individual Japanese industries for five
different years between 1964 and 1990, in order to identify the overall pattern of competitiveness and
to consider whether Japanese competitiveness may be considered ‘sustained’ on the basis of
differentiation as Porter claims. The evidence for the existence of clusters is examined and export
shares for those clusters calculated. This leads to the conclusion that the year 1985, on which Porter
based the analysis in CAN, was an atypical one for Japan, with many industries which were identified
as competitive losing ground in the following five years. Consistent with Porter’s stage analysis, there
was little evidence of clusters before 1970 when Japan was competing on a factor-driven basis but
20
Porter - The Final Judgment?
more evidence by 1985. However, although Japanese firms competed on a more sophisticated basis
by 1985, their strength was not based upon product differentiation, as predicted by Porter, but on the
basis of lower cost, now achieved through the management of value chains in ‘clusters’.
Of these five studies, only Suzuki’s results provide any support for CAN, and that resides
solely in the finding that clusters came into existence during the transition away from the factor-
driven stage of development. The overall conclusion is that the central hypothesis concerning the
importance of the home diamond is refuted. Within the logic of Porter’s approach, CAN might be
defended in two ways. The first is by noting that of the five countries examined only Japan might
have reached the innovation-led stage of development. In that case the others are competing on the
basis of a factor-driven approach or an investment-driven approach and the diamond does not need to
be in place. However, if that argument is made, Porter’s other assertion - that a country cannot
achieve prosperity without reaching the innovation-driven stage - is refuted as all four countries in
question have high levels of income which have been sustained over many decades. The alternative
defence, reflecting Porter’s judgment on the New Zealand economy, is to argue that prosperity in
these countries is ‘fragile’ and may not be sustained. However, as Yetton et al. (1992) note this
amounts to the assertion that ‘when the facts are not in line with the theory, it is the facts which must
be about to change’. The theory loses all scientific content, becoming an assertion of faith in the
central hypotheses.
In addition to the five studies which replicate CAN, there have been five others which
approach the book’s findings in a variety of ways, two of them maintaining the focus on the
importance of the diamond. The closest of these to the replications is a paper by Ellis and Pecotich
(1996) which examines the requirement for a strong diamond by carrying out a large number of
interviews in seven firms operating from Western Australia, including pairs of exporters and non-
exporters in the same industry. The interviews are used to assess qualitatively the strength of each
corner of the diamond, paying attention to both domestic and international conditions. The findings
are that none of the firms which were exporting successfully had access to strong home diamonds,
although international diamonds might have more explanatory value. Careful examination also
suggested that where the domestic diamonds did have strength these were correlates rather than
21
Porter - The Final Judgment?
determinants of success because the firms in question became successful before strength in the
diamond emerged.
In each of the studies above, the strength of the diamond is assessed through direct
observation of the components of each corner, for those industries or firms singled out as competitive.
The diamond hypothesis is rejected by finding that competitive industries do not have access to strong
diamonds. An alternative approach is taken by Cartwright (1993) who first divides New Zealand
industries into two groups, one strongly competitive and highly profitable and the other only
moderately competitive and having declining profits. Interval scales are then used to measure the
strength of each corner of the diamond for each industry, based on the author’s judgment, and two
hypotheses are then tested statistically. The first is that the scores for the competitive industries are
not significantly different from the ‘ideal’ scores according to Porter’s diamond model. The second
hypothesis is that the scores for the less competitive industries differ more from the ideal scores than
those for the competitive sectors. Both of those hypotheses are rejected as the highly competitive
industries have significantly different scores from the ideals predicted by the diamond model and the
less competitive industries actually have scores which are closer to the ideal diamond score than those
sectors which are more competitive. This study then goes on to use a case study of the New Zealand
dairy industry to exemplify the ways in which that sector draws on parts of the diamond in the United
States. In order to test empirically the hypothesis that the competitive strengths of New Zealand’s
industries are associated with access to ‘offshore’ diamonds a number of ‘offshore’ variables are
added, measuring the extent to which each industry is able to access corners of the diamond located in
other countries. The hypothesis testing procedure is then repeated by first examining a model in which
offshore variables are added to the original home base variables, and then by a model including only
offshore effects. The results show that for industries which are competitive both of the new models
improve the explanation of competitiveness. However, the ‘offshore only’ version, which ignores
home base effects, performs better than that with both effects, providing empirical support for the
view that access to the diamond in other countries can be more important than its configuration in the
home base.
22
Porter - The Final Judgment?
The remaining three empirical studies approach the analysis in very different ways. Grein and
Craig (1996) focus at the national level by identifying 12 variables intended to reflect national
strength in respect of the four corners of the diamond. Data is collected on those variables for 49
countries and exploratory factor analysis is used to determine whether four factors may be found
empirically. The results suggest that there are three factors or corners instead of the four hypothesised
in CAN, the three being interpreted as ‘infra-structure/demand’, ‘competitive investment’, and
‘education’. The factor scores for each nation are then used as the independent variables in regression
equations which seek to explain three dependent variables - GDP per capita, net exports per capita and
inward FDI per capita. The results show that the factor scores are very effective in predicting GDP per
capita across the full sample of 49 countries in both 1960 and 1985, and they have some success in
predicting inward FDI per capita. However, they do not perform well in predicting net exports per
capita. Separate regressions for industrialised and developing nations give significant results for net
exports per capita from developing countries, though not for industrialised nations, with some
differences between 1960 and 1985. The separate regressions also give significant results for inward
FDI for both groups of countries. While the national level approach is in direct contradiction to
Porter’s focus on industries, the authors see some support for CAN’s stage model in the finding that in
1960 ‘infra-structure/demand’ was the most significant determinant, while in 1985 ‘competitive
investment’ had become more significant. However, the main implications which are claimed in
respect of CAN are that a group of factors determining economic performance are identified, but that
they differ from the four corners of the diamond, suggesting that it requires amendment, particularly
in respect of recognising ‘education’ to be an important ‘corner’ in its own right.
Dominguez et al. (1993) focus on a sample of 253 nontraditional exporting companies in
Central America, in order to identify the impact of environment, strategies, competences and motives
on export performance. Data are collected on export performance and clustering is used to group
firms by their performance characteristics. Factor analysis is then used to identify three factors
representing strategy and two reflecting underlying competences. The environment is represented by
measures of labour-intensity and national location. Logistic regression is then used to test the impact
of strategy, competences and environment on membership of the different performance groups and
23
Porter - The Final Judgment?
analysis of variance is used to test whether labour-intensity or location account for differences in
motivation, competences or strategy across performance clusters. The analysis is interpreted as an
exploratory study of Porter’s framework which is interpreted as predicting that the highest performing
firms would be in labour-intensive industries in Honduras and Costa Rica. The results arising from
this rather baroque methodology show that membership of the different performance groups was not
significantly determined by either labour-intensity or location and that managerial factors were more
important. However, labour-intensity and location did positively affect the managerial variables,
notably motivation and competences, thereby having an indirect and positive effect on performance.
Porter’s assertion with respect to the ways in which firms compete in the factor-driven stage is found
to be largely supported by these results for that reason.
Finally, Healey and Dunham’s (1994) paper illustrates the extent to which some authors have
re-interpreted CAN in order to use it as a lens to focus on different issues. In this case the analysis is
concerned with explaining the changing competitiveness of a city economy in the United Kingdom,
where competitiveness is not measured in terms of productivity or export market share, but in terms of
employment. The diamond model is accepted as valid and is used as an organising framework to
examine the changes in the city’s corners over a period in which employment increased significantly.
As each of the four corners is found to have some influence in explaining the change in the city of
Coventry’s competitive advantage, the conclusion drawn is that the ideas in CAN deserve wider
application in local and regional economic studies.
A FINAL CONCLUSION?
Three sets of conclusions are in order; addressing conceptual issues, methodology and the robustness
of CAN’s empirical propositions. CAN’s conceptual foundations are undermined by three very basic
elisions or confusions. The first is between ‘competitiveness’ construed as productivity and
‘competitiveness’ construed as the market share held by a sub-set of industries. Porter begins by
clearly opting for the former interpretation but then shifts back and forth between the two, making
assertions based on one (prosperity depends on competitiveness qua productivity) while investigating
the other (competitiveness qua market share depends upon strong diamonds). As a nation’s prosperity
24
Porter - The Final Judgment?
does not depend upon the market share of a sub-set of industries, investigating the basis for market
share cannot elucidate the basis for prosperity. The second elision is between the nation construed as
the people in one place and the nation construed as the firms for whom that place is the home base.
While Porter’s central concern is to explain the prosperity of the nation in the first sense, the analysis
is conducted in terms of the second so that the conclusions drawn do not lie where they are placed.
The prosperity of the people in a place is not dependent upon the activities of the firms for whom that
place is the home base. The third elision lies in interpreting ‘competitive advantage’ as an equivalent
concept to ‘comparative advantage’, whereas the first is concerned to explain how firms in an industry
compete with each other while the second is concerned with which industries a location should have.
The combined effect of these elisions is to create a gap between that which is to be explained
and that which is actually examined. Explaining the prosperity of the people in a place requires an
explanation of the productivity of the activities carried out in that place, and the extent to which the
returns to those activities accrue locally. Explaining the market share of firms based in that place is a
different issue, largely irrelevant to the question on hand.
With respect to methodology, CAN fails the basic tests which may be applied to any piece of
research in respect of rigor. It contains no set of ‘ex ante’ hypotheses which are tested on an
appropriate set of data. Instead, the conclusions are drawn from the data in some unspecified manner.
Factors which are found to support competitive advantage in some circumstances are found to weaken
it in others, with no indication given of how that causal path is traced or the circumstances which
determine the sign of the relationship. The sample consists solely of industries identified as
‘successful’, thereby preventing any comparison between industries exhibiting different levels of
performance. The central conclusions are better described as hypotheses and these are specified in
such an ‘elastic’ way that they can only be refuted by being re-formulated more tightly.
At the empirical level, all five of CAN’s major propositions are refuted if they are framed
tightly enough for refutation to be possible. A nation does not need to reach the innovation-driven
stage in order to achieve sustained prosperity. A nation’s prosperity does not depend on the activities
of the firms for whom it is a home base. Industries which are internationally competitive very often do
not have strong diamonds. Inward foreign direct investment is not a sign that an economy is weak in
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Porter - The Final Judgment?
terms of its competitiveness/productivity and international success does not always need to be based
upon ‘up-grading’ through innovation, product differentiation and branding.
In the last analysis, then, we may amend Grant’s (1990) judgment from ‘gloriously rich but
hopelessly intractable’ to ‘hopelessly rich but gloriously wrong’.
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NOTES i A search of ABI/Inform, ABI/Inform Research and UMI Periodicals Abstract at the beginning of 1997 identified 34 reviews, 48 refereed papers and 6 unpublished PhD dissertations. ii Having defined competitiveness for himself, in terms of market share, Eilon (1990) notes that productivity may partly determine competitiveness but that it may also be assisted by low wages and low exchange rates and that Porter’s dismissal of these as sources of competitive advantage is therefore misplaced. This line of argument is one which was taken up by others in the empirical work (e.g. Daly, 1993). However, it may be argued that Porter’s definition of competitiveness is more complex than simply market share, requiring increasing returns to residents of the nation. This renders invalid the argument that competitiveness may be enhanced through low wages or exchange rates. iii This gap is half-closed, adding further confusion, by the way in which Porter’s empirical work identifies a country’s most competitive industries. This is done by first selecting those industries which have a higher share of world exports than the country’s average. That is measuring the competitiveness of firms located in the country, including those whose home base is elsewhere. However, having selected industries in this way, adjustment is made in some ‘ad hoc’ fashion to further include industries which have significant market share overseas through foreign direct investment. No attempt is made to de-select industries which have high export shares on the basis of high levels of inward investment. The industries selected therefore correspond to neither of the possible objects of the analysis. They are not necessarily industries where home-based firms have a significant world market share, because the high export share criterion may be met by the exports of local branches of foreign firms. Nor are they industries where operations located in the country under scrutiny are securing large market shares, because of the ‘ad hoc’ adjustment for shares held by outward foreign investment. The case of Singapore illustrates this problem vividly. That city-state’s manufacturing output and exports are almost entirely attributable to the subsidiaries of foreign firms. iv The book does have a Methodological Appendix but that only explains how the ‘cluster charts’ were drawn up. v JoFEB has since been re-named the Asia-Pacific Business Review.
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